Published on 11 May 2018

SUSTAINABLE FINANCE

Donald Trump’s withdrawal from Iran nuclear deal boosts oil extraction

Already subject to supply and demand constraints, oil prices are heavily influenced by geopolitical tensions concerning the nuclear deal with Iran, which Donald Trump has threatened to leave. As a result, oil companies are seeing their profits soar as they pump their reserves to full capacity.

On May 8, Donald Trump announced a reinstatement of sanctions on Iran.
@WhiteHouse

[Updated 09 May 2018]: On 8 May, Donald Trump announced the withdrawal of the United States from the Iran nuclear deal with a return of all sanctions. Immediately the barrel of oil gained 2% exceeding 76 dollars.

In recent weeks, oil prices have started to rise again, reaching $73 on 4 May, and even exceeding $75 on 30 April. Analysts are estimating that prices will reach $82 dollars in the coming weeks; a figure that hasn’t been seen since mid-2014. The oil hedge fund manager, Andurand Capital Management, has even suggested the possibility of $300 oil prices.

There are three reasons behind this rebound; two are structural. On one hand, there is a growing demand for oil.  According to the International Energy Agency (IEA), demand for oil will grow by 1.3 million barrels per day in 2018 to 99.1 million barrels per day, on average. On the other hand, the agreement between OPEC and Russia, that limits production and supports current prices, is still being respected.

Iran versus the United States

A third reason gives oil a huge boost in the short-term: the Donald Trump effect. He has threatened to withdraw from the nuclear deal with Iran. The original deal was signed in Vienna in July 2015 by Tehran and the P5+1 powers (China, United States, France, Great Britain, Russia and Germany). The current White House resident has given Europeans until 12 May to fix the "terrible shortcomings" in the deal’s original text.

In response, Iran has warned that it will leave the historic nuclear deal if the US does so. "Any change or amendment to the current deal will not be accepted by Iran," said Ali Akbar Velayati, a senior international affairs adviser to Iran's Supreme Leader in comments made on the state television website. This geopolitical tension, which could potentially involve a new blockade around a country that produces 3.8 million barrels of oil per day, is enough to worry the markets, which are already vigilant considering unrest in Libya, Iraq, Nigeria and Venezuela.

Record profits for big oil

Indirectly, it is major companies that are profiting, after having to tighten their belts for the last four years. On Tuesday 1 May, leading oil & gas company, BP, announced exceptional results in the first quarter of 2018 with a 70% increase in its net profit to €2 billion. The French oil & gas company, Total, was also smiling this quarter with a profit increase of 13% to $2.88 billion.

Total CEO, Patrick Pouyanné, also confirmed that these results come from price increases "driven by sustained demand, compliance with OPEC-Russia quotas, and geopolitical tensions."  During this period, the French company produced 2.7 million barrels of oil equivalent (boe) per day, which is up 5%. It seems that the Yamal LNG project in Russia will not be for nothing.

Danger ahead for energy transition

In the wake of current events, Shell announced a profit increase of 41%, ExxonMobil 16%, and Chevron 13%. After four years of pressure, these manufacturers have managed to lower their breakeven points (the price per barrel they are able to produce without losing money) to less than $40. With a price per barrel set at more $70, major corporations become cash machines.

If Donald Trump actually decides to withdraw from the Iran Agreement in mid-May, big oil companies will continue to grow their assets. The risk is that they may put their (modest) energy transition ambitions on the backburner.

Still, signs are encouraging. In April, Total reaffirmed its ambition of becoming a major player in green electricity and gas by acquiring Direct Energie. It remains to be seen whether this goodwill will be at the expense of exploration and production.

 

Ludovic Dupin @LudovicDupin


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